Indian IT sector stocks have experienced a dramatic decline, with the Nifty IT index dropping around 23% since the start of the year, according to reports from The Times of India. This performance represents a sharp underperformance compared to the broader market decline of approximately 10%, making IT the worst-performing major sector in the Indian market over the past 12-18 months. The sector's struggles intensified in May 2026, when the Nifty IT index touched a near 3-year low, losing more than a fourth of its value since the beginning of the year.
The primary driver behind the sharp fall in Nifty IT can be attributed to rising AI disruption concerns, where 'AI deflation' is expected to compress pricing and automate parts of traditional services, as reported by The Times of India. Companies are facing cautious discretionary spending from clients, particularly in global markets, leading to slower deal conversions and revenue growth. The combination of these factors has created a challenging environment where traditional IT services are under pressure from AI-driven automation and reduced client spending. Recent developments show this trend is global, with IBM experiencing significant AI-related challenges, including a 13.15% single-day stock drop on February 23, 2026, and a 27% plunge in February due to concerns about AI tools like Anthropic's "Claude Code" directly threatening IBM's high-margin mainframe and consulting services.
Major IT companies have provided disappointing forward guidance, with HCLTech guided for just 1-4% revenue growth in FY27, Infosys guided 1.5-3.5%, and Wipro guided Q1 FY27 at -2% to flat, according to The Times of India. Despite the challenging outlook, IT companies are demonstrating strong financial health through record buybacks and dividends, with companies sitting on strong cash flows while facing slower growth in the near term. This trend is global, with IBM raising its 2026 free cash flow guidance to $15.7 billion and announcing a $12.5 billion generative AI book of business in Q4 2025. However, IBM's stock has declined 20.2% during 2022 inflation shock, requiring a 25.4% gain to breakeven, highlighting the sector-wide challenges.
For Antu Eapen Thomas, Senior Research Analyst at Geojit Investments Limited, the medium- to long-term outlook remains intact, supported by strong client relationships, deep expertise in regulated sectors, and legacy modernization opportunities, as reported by The Times of India. Sustaining this position will require continued investment in proprietary AI capabilities to enhance efficiency and drive business transformation. The sector is currently in a transition phase, rewarding shareholders through buybacks while recalibrating for an AI-driven future, rather than experiencing a complete structural slowdown. As per recent market analysis, IBM's strategic shift to a high-margin, software-centric business model is successfully underway, with software segment revenue growth accelerating to 14% YoY and annual recurring revenue reaching $23.6 billion, though Red Hat growth concerns persist with revenue decelerating to 8% in Q4 2025.
